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Sanctions and Nuclear Rollback: The Case of Iran

Dr. Rezaei is a research fellow at Center for Iranian Studies (IRAM) in Ankara, where he researches Iran’s foreign policy. His writings have appeared in Harvard’s Iran Matters, The National Interest, and Middle East Policy,among others. His forthcoming book is Iran’s Foreign Policy After the Nuclear Agreement: Politics of Normalizers and Traditionalists.

This research received support from the Association for the Study of the Middle East and Africa (ASMEA) in Washington, D.C.

The possibility that a nuclear-armed Iran may trigger a regional or global catastrophe has galvanized the debate over how the international community should react to such a threat. Although there was a consensus that decisive action was needed, there was little agreement among analysts or policy makers on what type of coercive measure to employ to roll back the program. After years of delays, the United States and other big powers settled on a carefully calibrated type of sanctions — smart sanctions — subsequently upgraded to super-smart sanctions. In a major victory for the international community, the Joint Comprehensive Plan of Action (JCPOA) was signed on July 14, 2015. This historic agreement obligated Iran to dramatically curtail its nuclear project in return for sanctions relief.

The objective of this study is to analyze how these sanctions forced the Islamic Republic to drastically curb its nuclear program, once a symbol of national pride on which vast resources were lavished. This study hypothesizes that the regime made this highly painful decision because economic collapse triggered an acute state of social anomie that threatened its legitimacy and therefore its survival.

The causal relations between economic deprivation and legitimacy have not been well explained by traditional economic theories. As a rule, sanctions literature favors macro-level indicators such as rates of unemployment, inflation and bankruptcy, among others. The metrics of anomie are more difficult to construct because normal and deviant behavior is culturally and politically determined. Most difficult to discern is the causal link between anomie and delegitimization, as it involves complex judgments about the normative underpinnings of a given society and its political system.

The complex relationship of economic hardship, anomie and delegitimization raises questions about replicating the sanctions experiment. In principle, calibrating economic pain through sanctions should be easy to repeat. But it is not entirely clear whether the international coalition that brought the nuclear deal to fruition can be reproduced. Measuring anomie is even more difficult; the anomie-legitimacy nexus is sensitive to myriad variations. Research indicates that a society accepts suffering if the deprivation is in the service of a higher cause. But the perception of "a higher cause" is subject to a variety of subtle endogenous and exogenous factors.

The importance of the Iranian case cannot be overstated. The JCPOA represents the most successful example of sanctions-triggered rollback to date. A rigorous analysis would likely broaden the theoretical literature on the subject. Iran’s proliferation has been and may still reemerge as an applied policy concern if, as expected, the United States were to revert to using sanctions. In this sense, this study can help gauge outcomes of a future effort to use sanctions in statecraft.

THEORY AND PRACTICE OF SANCTIONS

Sanctions, a critical part of international economic statecraft, are a preferred method of responding to the specific misdeeds of a target country. They have often been used to deal with would-be proliferators as defined by the Nuclear Non-proliferation Treaty (NPT) of 1970.

Sanctions theory is derived from the assumptions of rational-choice theory: discouraging "objectionable" behavior by increasing the "associated costs." The economic pain inflicted by sanctions is expected to force the offender into a cost-benefit calculus. If the cost of a behavior exceeds its benefit, a rational actor is expected to desist from pursuing it.1

As elegant as the rational-choice formulation may be, empirical research on the efficacy of sanctions has produced mixed results. The so-called "first wave" scholars have claimed that sanctions are ineffectual and even counterproductive. Robert Pape, for instance, challenged the emerging optimism about the effectiveness of economic sanctions as an alternative to military force, concluding that economic sanctions have little independent usefulness for the pursuit of noneconomic goals.2

The second-wave scholars countered this view, arguing that sanctions were more useful than "commonly thought" or given credit for. Still, there is no consensus that economic sanctions are effective instruments of statecraft.3 To provide a definite answer, in 1982, two former U.S. Treasury officials involved in crafting sanctions embarked on a massive historical study of their utility. The authors proved that, contrary to conventional wisdom, sanctions worked in about 40 of 115 instances, or 35 percent of cases. The new edition of the book concludes that "at the beginning of the twenty-first century… economic sanctions remain an important yet controversial foreign policy tool."4

The optimists view sanctions statecraft as an important tool for correcting prohibited behavior, whereas the pessimists consider that economic punishment does little to change the target country’s behavior. While both sides try to marshal empirical evidence, the discourse often feels like a profession of faith rather than a scientific debate. The optimists, a group dedicated to the liberal international order, are eager to prove that the international community and its economic statecraft could compel offenders to change course. The skeptics, on the other hand, put little stock in such an outcome, especially when proliferation is on the table.5

Regarding Iran, the division between sanctions optimists (see Daniel Drezner, Suzan Maloney and John Cassidy) and skeptics (see Steve Hanke, Brendan Taylor and Simon Jenkins) has been acute, with the latter dominating the field. More telling, even the small group of optimists has found it necessary to hedge their bets. They argue that economic statecraft may change the tactics of the regime but will not necessarily dissuade it from pursuing its nuclear goals. Others are plainly puzzled about Iran’s willingness to sacrifice so much for a project that promised to turn it into a virtual pariah state.6

Meghan L. O’Sullivan, an expert on sanctions in the George W. Bush administration, expressed a common frustration: "With a regime as opaque as Iran’s, it is difficult to assess how sanctions may be affecting the inner calculations of the government." Though not clearly articulated, this frustration is apparently related to the fact that observers seem to doubt whether the regime is lacking in rationality. One scholar who investigated the relevant literature found that scholars have failed to take account of a commonly accepted measure of rationality. In the absence of scientific criteria, much of the discourse devolved into assertions. As the author noted, when it came to evaluating the regime’s decision making, "rationality is in the eye of the beholder."7

This situation should come as no surprise, since sanctions theory is based on core assumptions favoring a certain view of political reality. One such postulate is that countries are unitary rational actors with clear channels of decision making. However, the Islamic Republic is a negotiated political order that some scholars describe as a polycentric arrangement of elites operating within a state or parastatal power base. The president, his government and the bureaucracy have often competed with the Islamic Revolutionary Guard Corps (IRGC) and large revolutionary foundations that the state does not control. The internal fragmentation of elites along personal or ideological lines has added to the confusion. In principle, the supreme leader is tasked with making binding decisions, but his power is far from absolute. Secretive, complex and intense maneuvering, intimidation, brinkmanship and even violence combine to generate a fluid but opaque decision-making process. The often-contradictory messages emanating from Tehran have confused not only outside observers but, on occasion, domestic players as well.8

Another hidden postulate of sanctions theory reflects the understanding that the political economy of all countries is essentially the same. But as Max Weber noted, the distributive aspect of a system’s legitimacy can take different forms. Virtually all traditional societies were built on patrimonialism: the elites, the patrons, used state resources to buy the loyalty of select client groups. Economic modernism and the globalization of the market economy have left pockets of what is known as neopatrimonialism, a system where market principles and patron-client relations lead an uneasy coexistence. Iran is a prime example, in so far as the various elites "purchase" the legitimacy of their respective clients with resources diverted from the state. Some studies have speculated that because the legitimacy is transactional, neopatrimonialism is particularly sensitive to sanctions, but no rigorous analysis has been produced.9

Inconvenient as neopatrimonialism may be for any regime fighting sanctions, for a rentier state the situation is virtually intolerable. As a rule, states that rely on oil or other commodities must contend with market cycles and therefore sometimes see prices and, by extension, their budgets, fluctuate widely. Sanctions, which dry up the stream of revenue from a key rent, are especially damaging to transactional legitimacy, since the clients, often the poorest members of society, have few chances to succeed in the more competitive free market. In Iran, the large parastatal economy, including the giant bonyads (foundations), which rely on oil receipts, form the backbone of the patronage system.

In what is the largest sanctions project ever, the international community, regional groupings and individual states have come together to target these vulnerabilities. In the process, a new breed of sanctions — smart sanctions and super-smart sanctions — have been deployed against the Iranian regime.

FROM SMART TO SUPER-SMART SANCTIONS

To dissuade would-be proliferators, the NPT architects developed a rollback plan predicated on a cost-benefit calculus. The high cost of acquiring a nuclear-weapons capability may influence the leaders, since their desire to have a nuclear program must be balanced against the danger of economic collapse and the loss of political power.10

In 2002, the National Council of Resistance of Iran (NCRI), the political wing of the militant group Mujahedin-e Khalq (MEK), publicized information about Iran’s secret nuclear sites in Natanz and Arak. For some years, the regime was able to prevent the Board of Governors of the International Atomic Energy Agency (IAEA) from sending Iran’s nuclear dossier to the UN Security Council (UNSC). Hassan Rouhani, then secretary of the Supreme National Security Council, who doubled as chief nuclear negotiator, was credited with warding off the sanctions threat. However, in 2005, Mahmoud Ahmadinejad, the leader of the Principlists movement, who insisted on Iran’s sovereign right to a nuclear program, came to power. The new president all but admitted his desire to join the "nuclear club," the five powers with a recognized nuclear-weapons program. Ahmadinejad’s belligerent and often bizarre behavior convinced the IAEA Board of Governors (BOG) to refer Iran’s dossier to the UNSC.11

Resolution 1696, adopted on July 31, 2006, ordered Iran to stop enrichment by August 31— an effective 30-day deadline — as a gesture of good faith, and undertake some confidence-building measures outlined in IAEA BOG resolution GOV/2006/14. No sanctions were mentioned should Iran miss the deadline. However, the measure called uponall states to exercise vigilance and prevent the transfer of any technology that could contribute to Iran’s enrichment-related reprocessing activities and its ballistic missile program.12 After Iran failed to comply, on December 23, 2006, the UNSC passed Resolution 1737. The document stated that Iran had failed to meet the requirements of the IAEA BOG and to comply with UNSC Resolution 1696. It called upon Iran to cooperate with the agency and suspend all of its enrichment-related and reprocessing activities.13

The resolution imposed sanctions banning the supply of nuclear-related technology and materials, limited the travel of many Iranian officials, and froze the assets of 40 key entities and individuals, among them Bank Sepah and a range of front companies linked with the nuclear program. In addition, the assets of those entities, and of 12 prominent figures mentioned in the resolution, were frozen for being involved in "proliferation sensitive activity." Further, the resolution banned technical cooperation that might contribute to Iran’s nuclear program. However, the resolutions did not result in a public reversal by the government.14

Iran once again defied the 60-day deadline provided by Resolution 1737. Punishment came swiftly: On March 24, 2007, the UNSC adopted Resolution 1747, calling on Iran to comply with previous resolutions and requiring the BOG to verify that Iran’s nuclear program was for peaceful purposes only. Additionally, the resolution urged Iran to consider the June 2006 proposals to achieve a permanent and comprehensive deal with the P5+1 (the United States, the United Kingdom, China, France, Russia and Germany).15

The resolution broadened the previous sanctions package, expanding the freeze on assets of individuals and entities engaged in the nuclear project. Twenty-eight individuals and the state-run Bank Sepah, Iran’s fourth largest bank and affiliated with the IRGC, were subject to severe financial restrictions. It banned arms sales to the Islamic Republic and prohibited Tehran from exporting conventional weapons. The document called on all countries to exercise "vigilance and restraint" in transferring nuclear-related military equipment to Iran, refrain from entering "new commitments for grants, concessional loans and financial assistance." About one month later, the European Union published an extended list of Iranian entities and individuals considered "persona non grata" by the bloc.16

As it turned out, the protocol for assessing Iran’s threshold of pain was quite simple; each resolution was progressively more devastating to the economy. On March 3, 2008, the UNSC passed Resolution 1803, calling on Iran to halt all uranium enrichment and related experiments, and close its heavy-water facility. The provision targeted Iranian banks, notably Bank Saderat and Bank Melli Iran (BMI), their foreign branches and subsidiaries found to play a key role in financing sensitive nuclear activities or helping to develop ballistic missiles. The resolution further extended a freeze of the financial assets of individuals and companies associated with the nuclear project, while imposing travel restrictions on more individuals involved. In what promised to be another painful step, the resolution banned the supply of dual-use items (civil and military) to Iran’s nuclear program. By way of extending a carrot, the UNSC offered to engage in a new round of negotiations, provided Iran suspended its enrichment.17

With no response from Tehran, the UNSC voted to impose yet another round of sanctions. Passed on September 27, 2008, Resolution 1835 ordered Iran to halt its uranium enrichment, but due to opposition from China and Russia, no new sanctions were imposed. Instead, the document expanded a partial ban on trade in all dual-use materials and added 12 companies and 13 individuals to the list of those suspected of working on the nuclear and missile programs.18

Unilaterally, Washington introduced further financial restrictions, prohibiting U.S. banks from mediating in any capacity the transit of funds to and from Iran. As a result, several foreign banks — HSBC, Standard Chartered and Citibank — stopped dealing with Iran and urged their Iranian customers either to withdraw their deposits or convert them to a currency other than the U.S. dollar.19

Meanwhile, the UNSC on June 9, 2010, passed Resolution 1929, which chastised Iran for its failure to comply with the conditions of previous resolutions. The new resolution, a mix of old and new sanctions, required Iran to suspend all its uranium enrichment and reprocessing activities and to fully cooperate with the IAEA. The penalties for failing to do so piled up; a further squeeze was imposed on IRGC-owned businesses, Iran’s commercial and financial-services sector, and the country’s shipping industry.20

In addition to banning Iran from engaging in any activities related to ballistic missiles, the resolution also imposed travel bans on individuals involved with the nuclear program, tightened the arms embargo, and froze the assets and funds of Iran’s shipping lines and the IRGC. Additionally, the resolution targeted Iran’s oil supply and punished foreign groups engaged in financing its oil sector.21

Unilateral American sanctions added to the pressure. In July 2010, President Barack Obama signed into law the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA). The law added a broad range of measures further restricting the already limited amount of U.S. trade with Iran and restricting some high-technology trade with countries that allow WMD-useful technology to reach Iran. Acting in conjunction with the UN sanctions, CISADA curtailed Iran’s ability to develop its oil and gas fields.22

CISADA’s secondary and tertiary effects were particularly damaging. Unwilling to get snared in the net cast by the Americans, countries, individuals and companies steered clear of business with Iran. A stream of major international corporations announced a departure from the Iranian market. For instance, Munich Re and Allianz, two major insurance companies, declared that they would stop insuring cargo in and out of Iran.23 Vitol and Trafigura, two key global oil brokers, made it known that they would stop deliveries of refined gasoline to Iran. Total, Shell and British Petroleum similarly declared that they would stop supplying gasoline to Iran. The EU, which embargoed imports of crude oil from Iran, compounded the blow to the energy sector. In a further move to align itself with the United States, the EU curtailed its own involvement in Iran’s energy industry and restricted banking relationships and trade financing with Iran. This was more significant because EU and U.S. trade amounted to 18 percent of Iran’s total export revenue. One empirical study indicated that the trade ratios between 2011 and 2013 decreased by 14-18 percent, shrinking Iran’s Gross Domestic Product (GDP) by 3.8 percent.24

In total, CISADA made it hard to sell refined petroleum, gasoline and gasoline-production-related services or sell advanced equipment that would have enabled Iran to expand its own ability to produce refined petroleum. In addition, as a result of the enactment, sanctionable activities included sales of equipment with which Iran could import gasoline (such as tankers) and equipment that Iran could use to construct an energy pipeline.25

The new round of sanctions had a dual purpose: making it harder on Iran to obtain technology for its nuclear program and preventing Ahmadinejad from delivering on his election promise to improve the economy. In fact, the sanctions made his famous slogan "oil money on every Iranian table" ring particularly hollow, and by mid-2010 it became obvious that the sanctions had triggered the above-mentioned cost-benefit discourse. Clearly on the defensive, Ahmadinejad and the Principlists redoubled their efforts to rally support for the nuclear program. Using his trademark rhetoric, the president dismissed the June resolution, stating that "such a resolution is worth nothing for the Iranian nation [and] looks like used toilet paper that has to be thrown away to the dustbin." But their opponents, a coalition of moderate followers of former President Mohammad Khatami and Hassan Rouhani, pointed out that Ahmadinejad’s cavalier attitude toward the United Nations was robbing people of their right to economic well-being. Rouhani went so far as to suggest that economic rights trump nuclear rights, no matter how legitimate they may seem. He was also quick to point out that the sanctions had hurt the poorest members of society and warned that their burden would increase.26

Proving Rouhani right, in May 2011, Washington blacklisted Iran’s Bank-e Sanaat va Maadan (Bank of Industry and Mines) for transactions with previously banned institutions. The UNSC followed up with Resolution 1984 on June 9, 2011, calling on Iran to ratify the Comprehensive Nuclear Test Ban Treaty (CTBT). It also urged Tehran to reaffirm its full cooperation with the IAEA and respond to a number of outstanding issues, mostly concerning its past experiments with weaponization known as Possible Military Dimensions (PMD).27

The resolution extended the mandate of the Iran Sanctions Committee (ISC), a panel of experts established on December 23, 2006, to supervise and monitor the UN sanctions. Under the new provisions, Iranian banks were prevented from creating new joint ventures, opening new branches, taking an ownership interest in or maintaining or establishing correspondent relations with banks in their sphere of interest. Furthermore, the resolution prohibited financial institutions from opening branches or bank accounts in Iran.28 In addition, Washington unilaterally beefed up sanctions against those individuals and entities investing in or supporting the development of Iran’s oil sector. As a consequence, in December 2011, the assets of financial institutions that traded with the Central Bank of Iran (CBI) in the oil sector were frozen.29

Washington was well-positioned to wage financial warfare against Iran. The Obama administration could use an array of sophisticated tools developed by the Office of Terrorism and Financial Intelligence (TFI) in the Treasury Department under Stewart Levey and his successor, David S. Cohen, both considered master architects of smart sanctions. Juan C. Zarate, a Treasury official, stressed that some in Tehran understood "they were under a financial attack of a new kind" and apparently closely monitored Cohen during his many appearances abroad.30

On January 23, 2012, the EU imposed new sanctions, including a full ban on Iranian oil exports and freezing the assets of Bank Melli Iran (BMI) and CBI. Two weeks later, on February 6, 2012, U.S. Executive Order (EO) 13599 imposed a set of sanctions on CBI and other financial intuitions and seized the assets of CBI in the United States.31

Most critically, on March 15, acting on the EU order, the Belgian-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) declared it would bar Iranian banks from its network. The involvement of SWIFT, the world’s largest electronic-payment system, represented a new phase of sanctions statecraft, turning smart sanctions into super-smart ones. The SWIFT declaration coincided with reports that major currency exchangers in the United Arab Emirates (UAE) had stopped handling the Iranian rial, a development that further reduced Tehran’s ability to trade and acquire hard currency.32

The financial disruption proved devastating to Iran’s economy in many ways. CBI and other major Iranian banks — Bank Mellat, Tejarat Bank, Future Bank, Bank Refah, Post Bank, Persia International Bank and Europäisch-Iranische Handelsbank — could not conduct international transactions. Virtually overnight, Iran became financially isolated; money could not flow in and out of the country through official banking channels.33

Financial sanctions made receiving payments for oil, a vital component of Iran’s economy and a key source of government income and foreign currency, substantially more difficult. They limited Iran’s ability to conduct financial transactions and finance trade or, at best, increased dramatically the costs. For instance, according to reports by global financial organizations, many foreign banks and financial institutions were reluctant to process transactions for Iranian citizens and businesses, even when it was not clear that these transactions would trigger sanctions. Unable to arrange financing for trade abroad, company officials were forced to transfer suitcases of cash to shady foreign banks using the services of street-level money changers. With brokers exacting fees every step of the way, this practice was not only costly but also risky, as cash was a tempting target for thieves.34

The SWIFT blow was followed by American pressure to persuade Iran’s top oil customers — Japan, South Korea and India — to cut their imports. In case of noncompliance, Asian companies involved in oil trade faced an array of penalties: being barred from receiving U.S. Export-Import Bank financing, U.S. export licenses, and loans over $10 million from the U.S. financial institutions, among others. In fact, Washington forced these countries to choose between doing business with the United States or Iran. Additional American sanctions tightened the economic noose. A May 1, 2012, EO targeted persons engaged in misleading practices to withhold or obscure information about Iranian links to financial transactions.35

On June 7, 2012, the UNSC passed Resolution 2049, extending the mandate of the panel of experts of its committee to monitor the implementation of the sanctions regime against Iran. Though the resolution did not impose new sanctions, the United States and the EU brought forth an array of new ones. On July 12, 2012, the United States imposed another round on Iranians and foreign individuals and entities that contributed to the development of Iran’s weapons program. The administration also sanctioned the National Iranian Tanker Co. (NITC), including 58 tankers, 27 of its entities and 11 front companies in the UAE, South East Asia and Europe.36

On July 30, 2012, EO 13622 imposed new sanctions on Iran’s oil sector and petrochemical products, applied virtually the same sanctions as the Iran Sanctions Act (ISA) and banned foreign banks and financial institutions from transactions facilitating purchase of Iran’s oil, petrochemicals and petroleum products. Additionally, the EO declared that foreign banks and financial institutions would be sanctioned if they knowingly conducted or facilitated any financial transaction with Iran’s Naftiran Intertrade Company (NICO) or the National Iranian Oil Company (NIOC). According to the EO, banks and financial institutions could also be punished if they conducted financial transactions for the purchase of Iran’s oil, petroleum or petrochemical products through any channel other than just the NICO and NIOC. It was under this order that several companies, including two Iraqi and Chinese banks, were sanctioned for transactions related to the sale of petrochemical products to Iran.37

The year 2013 brought another round of American sanctions. The National Defense Authorization Act for fiscal year (FY) 2013, signed on January 2, 2013, imposed sanctions on all entities determined to provide services and goods to Iran’s energy, shipping and shipbuilding sectors, as well as Iran’s port operations. Insurance providers for a wide range of transactions with Iran, including those related to oil and gasoline shipment, or goods for Iran’s energy, shipbuilding or shipping sectors, were targeted as well. Sanctions against foreign firms transferring gold and other precious metals in exchange for oil and other products were extremely effective. In conjunction with SWIFT, they choked off almost all avenues of trade.38

The Iran Threat Reduction Act (ITRA), which went into effect on February 6, 2013, further impeded Iran’s ability to acquire hard currency. The net effect was to prevent Tehran from repatriating its hard currency and force it to purchase the products of its oil customers. Executive Order 13645 of June 30, 2013, (effective July 1, 2013) imposed ISA sanctions on organizations providing services and goods to the Iranian automotive sector. The provision also blocked foreign financial institutions and banks from participating in the American market should they perform any transactions with Iran’s automotive sector. Moreover, the provision banned U.S. bank accounts held by banks and financial institutions that conducted transactions in the Iranian rial, or held rial accounts.39

The EU compounded the economic damage by outlawing transactions with Iranian financial institutions and slapping an embargo on its natural gas. Additional measures pertained to exploration and production of crude oil and natural gas, the refining of crude oil, liquefaction of natural gas and the petrochemical industry.40

DEVASTATION IN SLOW MOTION

Collectively, the smart and super-smart sanctions dramatically affected Iran’s economy. Oil sales, which accounted for 60 percent of the government’s revenue, were cut in half. By late 2013, sanctions reduced Iran’s oil exports to about 1 million barrels per day (bbl/d), far below the 2.5 million bbl/d Iran had exported during 2011. The decline in oil revenue was very substantial, plummeting from $100 billion in 2011 to about $35 billion in 2013. Given that oil receipts funded nearly 60 percent of government expenditures, the shortage was traumatic.41

The range and severity of the sanctions caught the regime by surprise. The highly secretive SWIFT maneuver became known in Tehran only three days before the official announcement. Though Ahmadinejad tried to apply his usual positive spin, his numbers did not add up. He claimed, for example, that Iran had $100 billion in foreign-exchange reserves, a sum that, in his view, provided a healthy margin of safety for the country. But he failed to mention that most of the money was in foreign accounts and could not be brought back home; as of February 2013, Iran was effectively barred from repatriating assets accumulated from oil exports and held overseas.42

Iranian shoppers could see the consequences of the sanctions in their nearest stores. Shelves were stocked with low-quality Chinese products, most of them bought for a premium price and debited to accounts trapped in Chinese banks. While basic needs were met, advanced Western medicine was scarce, a shortage that added to the general misery. The plight of cancer patients was well-documented, causing one American journalist to comment that killing Iranians with air strikes would be more humane: "Limited airstrikes on Iran may actually be the more morally sound course of actions because a couple of thousand deaths might be worth it to avoid the livelihoods of 75 million people [being] destroyed."43

In a rentier state like Iran, the disruption of oil exports was bound to cascade through the economy. A drop in the value of the currency was indicative of things to come. In October 2012, the rial fell to a record low against the U.S. dollar, having lost about 80 percent of its value in a year. The unofficial value of the dollar went from 10,352 rials in January 2011 to 40,000 rials in October 2012, when the government tried to manage the currency market. It introduced a new rate by means of a currency-exchange mechanism that was initially successful but failed to provide a sustainable flow to the various economic sectors that needed hard currency.44

During 2012-13, the loss of revenue from oil, coupled with reverberations from SWIFT, raised the rate of inflation to over 50 percent. Iran’s economy shrank by about 5 percent in 2013 as many Iranian firms reduced operations; defaults on loans became endemic. In the poorly regulated and highly undercapitalized banks, nonperforming loans rose to 14.4 percent of the total, causing severe cash-flow problems in the corporate sector.45

Data from the Statistical Center of Iran (SCI) indicate that Iran’s GDP had contracted by a cumulative 8.6 percent during fiscal 2012-13 and 2013-14. The annual GDP growth rate fell from 6.62 percent in 2010 to -9 percent in 2012, taking into account the sharp depreciation of exchange rates in both the official and black markets. GDP declined from a peak of $514 billion in 2011-12 to $342 billion in 2013-14. The forgone annual economic output of $57 billion amounted to some $730 a year for every Iranian. Inflation rose from about 12 percent in late 2010 to around 37.39 percent in 2012 and more than 50 percent in early 2013; unemployment inched close to 20 percent.46

The drop in the value of the riyal accelerated inflation, putting Iran at the top of the IMF’s global-inflation index, with a rate of 42.3 percent during the first three months of 2013. According to CBI, the inflation rate reached 45 percent in July 2013 and increased to 56 percent during the last three months of 2013. Many economists asserted that the actual rate was closer to 71 percent.47

Because Iran’s manufacturing sector relies on imported parts, the currency decline and financing restrictions made operations difficult. Many Iranian manufacturers were unable to obtain credit and had to pre-pay, often using circuitous and time-consuming mechanisms to obtain parts from abroad.48 The resulting unemployment was particularly demoralizing; at the end of the calendar year in March 2013, 12 million people were out of work, roughly 50 percent of the employed population.

After the EU embargo on Iranian crude oil, there was a dramatic decline in oil sales: from 2.5 million bbl/d in 2011 to 1.25 million bbl/d in 2012. Given that oil receipts funded nearly 60 percent of government expenditures, the shortage was traumatic.49 Iran’s ambitious plan to develop an export industry was caught in the downturn, further complicating matters. Having debated for more than a decade the need to lessen its dependency on oil, the regime was taking its first steps in building a strong manufacturing sector just before the sanctions hit.50

Psychologically, the effect was significant, generating fear and uncertainty. Reminiscent of the last years of the shah’s rule, rumors circulated that merchants in the bazaars of Tehran and provincial cities were hoarding, prompting the price of basic foodstuffs to skyrocket. Rumors of an imminent American strike on nuclear and military targets and speculation about an Iraq-style invasion fed domestic anxiety. Many thought the country was sliding back into pariah status, a situation President Khatami had worked hard to reverse.51 In fact, the frequent comparisons between Khatami and Ahmadinejad were underpinned by a sense that, after decades of hardship and sacrifice for the revolution, Iran had taken a profound turn for the worse.

ANOMIE AND DELEGITIMIZATION

As indicated above, the regime had something of a chronic legitimacy problem because of the mandatory Islamic lifestyle, which large segments of the more urban and better educated population resented. The IRGC, which used secret polls to monitor public opinion, was fully aware of these trends. Oil receipts and moderate coercion helped to sustain a façade of legitimacy, but the collapsing economy upset this delicate balance.

At the collective level, the distress suffered by the population manifested itself in the so-called misery index, a measure of rates of unemployment, inflation and interest rates minus the percentage change in real GDP per capita.52 The 2012 index ranked Iran just below Venezuela, the world’s most miserable country, at 79.4 percent. At the end of Ahmadinejad’s tenure in 2013, Iran topped the list, displacing Venezuela and some other notoriously disadvantaged societies.53

Powerful as the misery index is, it is a statistical aggregate that does not automatically translate into delegitimization. After all, some of the chronically high-scoring countries on the list have never developed a crisis of legitimacy — nor, as noted, have countries where the suffering is perceived as a virtuous act to achieve a cherished goal, such as war against an aggressor, for example.

Social psychologists suggest that there is an intermediate link between a sense of economic malaise and an anomic state that triggers delegitimizing behavior. Such research is based on Aristotelian ethics, which posits that eudaimonia, a sense of individual well-being, is necessary for a society to flourish. Further, in evaluating their wellbeing, individuals use several parameters, including a normative component, to gauge the standard for wellbeing at a given time. As a rule, individuals who develop a negative sense of wellbeing tend to manifest anomic behavior at odds with the societal norm. Emile Durkheim advanced this negative eudaimonia to suggest that anomic behavior could be measured in rates of suicide. In his groundbreaking study, he proved that in times of social stress, a higher percentage of individuals would resort to breaking the universal taboo on taking one’s life. Other scholars added murder, theft, drug use, divorce, alcoholism, and public and domestic violence to the list of anomic behaviors. For instance, Mikhail Gorbachev admitted that the deep crisis of legitimacy in the Soviet Union in the early 1980s was partly driven by alarming rates of anomie. When he tried to address the issue by declaring a campaign against alcoholism and tinkered with the system under the slogan of glasnost and perestroika, however, the Soviet Union collapsed.54

Clearly, the level of anomie rose sharply during the Ahmadinejad years, registering record levels in virtually every category: divorce, adultery, homicide and violent crime, particularly in large urban areas. Among other indicators, suicides rose 30 percent from 2009 to 2013, and the number of drug addicts increased by six million from about 2 percent of the population in 2006 to 8 percent in 2014.55

Sexually transmitted diseases (STD) and their impact on fertility rates are a less well known but highly significant metric of anomie. Although statistics on HIV and AIDS are closely guarded, Iranian epidemiological studies indicated very high levels of STDs, notably HIV and chlamydia. HIV-AIDS rates have gone up ninefold since 2004, by an 80 percent increase each year. Evidence also suggests that the number of prostitutes has increased during this time, causing a chlamydia epidemic and resultant high infertility rates. The number of live births went down from seven children per woman in 1979 to just 1.6 in 2012. Never at a loss for words, Ahmadinejad declared that women who refuse to have children were guilty of "genocide against the country."56

Media coverage reinforced the sense of growing social gloom. Saeed Moayedfar, head of Iran’s Sociological Association, argued, "Due to the worsening economic situation, our society is facing anomie to the extent that nowadays having 10,000 Toman ($3) in your pocket brings the risk of extortion. This should raise the alarm and we should be ready for a social crisis and ready to face more and worse crimes."57

For a regime that reveled in lambasting the "decadent culture" of the West, these statistics were particularly distressing. Even more alarming was the sense that anomic behavior posed a real threat to the survival of the regime. Ahmadinejad’s Ministry of Culture and Islamic Guidance was careful to censure any linkage of anomie to the sanctions crisis. Still, the sanctions and their socioeconomic consequences dominated the 2013 presidential elections. Hassan Rouhani, the former nuclear negotiator, led a coalition of moderate politicians known as Normalizers. Rouhani and his colleagues argued that the cost of the sanctions well outweighed the benefits of the nuclear project. They urged giving up the vision of a nuclear deterrent and normalizing Iran’s international position by rejoining the community of nations. Their opponents, known as the Principlists, a coalition Ahmadinejad put together in 2005, were bitterly opposed to a nuclear compromise. They maintained that Iran had a right to enrich uranium under the NPT and urged the citizens to bear the cost of the sanctions in the name of national pride. Rouhani responded by hammering on the zero-sum nature of the nuclear game and reminded the public about the high cost being paid by individuals.58

Both sides appealed to Supreme Leader Ayatollah Khamenei, who favored the Principlist candidate, Saeed Jalili. But Rouhani and former President Akbar Rafsanjani worked hard to convince Khamenei of the scope of the danger to the regime. Insiders reported Khamenei was especially concerned about the precipitous drop in fertility attributed to sexually transmitted diseases. Although the IRGC was confident that coercion would compensate for the deficit in legitimacy, Jalili’s meager popular support caused the hardliners to experience a setback. When the presidential ballots were counted on June 14, 2013, Jalili garnered 11 percent of the vote compared to more than 50 percent for Rouhani. The results were perceived as a resounding victory for all those who agreed that the cost of the program was too high and the benefits too few to justify widespread suffering. Indeed, in one of his stump speeches, Rouhani noted that the Iranian people deserve a decent standard of living: "The people want to live a better life, to have dignity and regain their deserved status among the nations."59

Soon after taking office, in August 2013 the Rouhani administration joined the P5+1 to discuss a nuclear pact. Following arduous negotiations, on July 14, 2015, Iran and the P5+1 signed the JCPOA, a historic deal that promised sanctions relief in return for rolling back the project.

By any measure, the JCPOA wiped out most of the achievements of Iran’s decades-long nuclear endeavor. Iran has been restricted to 6,000 IR-1 first-generation centrifuges of limited enrichment capacity. In addition, Iran has been allowed 300 kg of low enriched uranium (LEU) per year; excess LEU had to be shipped out of the country. These limitations were devised with a view to lengthening the breakout time — the length of time Iran would need to fabricate enough weapons-grade uranium for a single nuclear weapon — in case the government reneged on the agreement.60

The one-year timetable is limited to uranium production alone. It does not include projections about other aspects of weaponization: fabricating the metallic core of the weapon from the powdered uranium hexaboride, building the trigger mechanism, integrating the weapon package into a delivery system and testing. To prevent Iran from cheating, the JCPOA offered a strict safeguards protocol based on electronic monitoring, visits by IAEA inspectors, and unspecified cyber sleuthing. Depending on the type of activity, the JCPOA restrictions would be lifted in 10-15 years, but the Additional Protocol that Iran is obliged to ratify would guarantee stringent IAEA oversight beyond the agreement’s expiration date. Should Iran default on its JCPOA obligations, sanctions would be reinstated.61

PROSPECTS

By any measure, the JCPOA wiped out most of the achievements of the decades-long and extremely costly nuclear program. The international sanctions regime imposed on Iran testifies to the efficacy of sanctions statecraft in stopping proliferation. A triumph of applied policy, the case has also boosted the theoretical literature, where, as noted, the debates between optimists and skeptics often sounded like professions of faith.

This analysis also indicates, however, that the negotiated political order harbors factors that make a reversal of the JCPOA possible under certain circumstances. The Principlists have not accepted the nuclear setback and are even less keen on having Iran join the community of nations. Although the supreme leader barred Ahmadinejad from running in the presidential election in May 2017, Principlist candidates such as Jalili have promised to reverse the nuclear deal if they have the opportunity. What is more, the IRGC, which was in charge of running the program, has enough resources to renew illicit production. This time around, the Principlists may even win the public debate, should the administration of Donald Trump and the Republican-dominated Congress impose new sanctions. In any event, unilateral sanctions are not expected to inflict the level of hardship necessary to trigger the type of anomie that would lead to a legitimacy crisis.

1 Robert A. Pape, "Why Economic Sanctions Do Not Work," International Security 22, no. 2 (1997): 90-136; and Joseph Cirincione, Bomb Scare: The History And Future of Nuclear Weapons (Columbia University Press, 2007).

7 Meghan L. O’Sullivan, "The Role and Potential of Sanctions," in Iran: The Nuclear Challenge, ed. Robert D. Blackwill (Council on Foreign Relations, 2012),13-20; and Ofira Seliktar, "Assessing Iran’s Nuclear Rationality: The ‘Eye of the Beholder’ Problem," Journal of the Middle East and Africa 2, no. 2 (2011): 188-206.

8 Ofira Seliktar, "Reading Tehran in Washington, The Problem of Defining the Fundamentalist Regime in Iran and Assessing the Prospect for Political Change," in Political Islam from Muhammad to Ahmadinejad: Defenders, Detractors, and Definitions, ed. Joseph Morrison Skelly (Praeger, 2010), 163-181.

9 Max Weber, On Charisma and Institution Building (University of Chicago Press, 1968).

12 UNSC Resolution 1696, Adopted by the Security Council at its 5500th Meeting on the Non-proliferation of Nuclear Weapons, Official Record, S/RES/1696, United Nations Security Council (UNSC), July 31, 2006.

13 UNSC Resolution 1737, Adopted by the Security Council at its 5612th Meeting on the Non-proliferation of Nuclear Weapons, Official Record, S/RES/1737, United Nations Security Council (UNSC), December 23, 2006.

14 Ibid.

15 UNSC Resolution 1747, Adopted by the Security Council at its 5647th Meeting on the Non-proliferation of Nuclear Weapons, Official Record, S/RES/1747, United Nations Security Council (UNSC), March 24, 2007.

16 Ibid., "Council Regulations (EC) No. 423/2007 of 19 April 2007 Concerning Restrictive Measures against Iran," Official Journal of the European Union, April 20, 2007, trade.ec.europa.eu/doclib/docs/2010/august/tradoc_146397.pdf.

17 UNSC Resolution 1803, Adopted by the Security Council at its 5848th Meeting on the Non-proliferation of Nuclear Weapons, Official Record, S/RES/1803, United Nations Security Council (UNSC), March 3, 2008.

18 UNSC Resolution 1835, Adopted by the Security Council at its 5984th Meeting on the Non-proliferation of Nuclear Weapons, Official Record, S/RES/1835, United Nations Security Council (UNSC), September 27, 2008.

20 UNSC Resolution 1929, Adopted by the Security Council at its 6335th Meeting on the Non-proliferation of Nuclear Weapons, Official Record, S/RES/1929, United Nations Security Council (UNSC), June 9, 2010.

29 Chris McGreal and Julian Borger, "Iran Faces New Wave of Sanctions over Nuclear Programme," The Guardian, November 21, 2011; and Mark Landler, "United States and Its Allies Expand Sanctions on Iran," New York Times, November 21, 2011.

32 Rick Gladstone and Stephen Castle, "Global Network Expels as Many as 30 of Iran’s Banks in Move to Isolate Its Economy," New York Times, March 15, 2012; and BBC News, "Iran’s Banks to Be Blocked from Global Banking System," March 15, 2012, http://www.bbc.com/news/business-17390456.&nbsp;

34 GAO, U.S. and International Sanctions Have Adversely Affected the Iranian Economy: Report to the Chairman, Committee on Homeland Security and Governmental Affairs (U.S. Senate, GAO-13-326, February 2013); and Thomas Erdbrink, "Iran Staggers as Sanctions Hit Economy," New York Times, September 30, 2013.

35 "Executive Order 13608: Prohibiting Certain Transactions With and Suspending Entry Into the United States of Foreign Sanctions Evaders With Respect to Iran and Syria," Presidential Documents 77 (May 1, 2012).

52 To obtain a clear picture of the economic conditions experienced by the majority of Iranians, we can construct a misery index. The misery index value I use expands on Okun’s (and Harvard economist Robert Barro’s Misery Index) by adding inflation, unemployment, and interest rates and then subtracting the year-over-year percent change in GDP per capita.

60 Moshe Ya’alon, "Current Iran Framework Will Make War More Likely," Washington Post, April 8, 2015; David E. Sanger and William J. Broad, "In Iran Talks, U.S. Seeks to Prevent a Covert Weapon," New York Times, November 22, 2014; Justsecurity.org, "Joint Comprehensive Plan of Action," July 14, 2015, https://www.justsecurity.org/wp-content/uploads/2015/07/271545626-Iran-…;

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